Test questions #4

Which of the following statements is not true? A) Exempt securities must reestablish their exemptions at least annually. B) Federal covered securities include those registered under the Investment Company Act of 1940. C) Federal covered securities include securities listed on national exchanges. D) Transaction exemptions must be established before each transaction.

A - Exempt securities need not reestablish their exemptions annually or otherwise.

GEMCO Securities, Inc., a broker-dealer registered in the state, has over 10,000 clients ranging from small individual accounts to substantial institutions. GEMCO has determined that the most efficient way to maintain contact with its clients is through electronic communications. Under the USA, these emails must be retained by the broker-dealer for a minimum of A) 3 years B) 8 years C) 2 years D) 5 years

A - The USA specifies that all records, including electronic communications (emails), must be maintained for a minimum of 3 years. For investment advisers, the requirement is 5 years.

One of the portions of the USA PATRIOT Act of 2001that affects the opening of an account for a new customer is A) the customer identification program B) the requirement to obtain suitability information C) the "know-your-customer rule" D) the Transportation Security Administration (TSA)

A

Your client is 75 years old and has $100,000 to invest. He enjoys a relatively high income and is not concerned with immediate liquidity, although he is risk averse. The most suitable asset allocation strategies listed below would be A) a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund B) a 50% municipal bond fund, 40% money market fund, 10% large-cap common stock fund C) a 50% municipal bond fund, 50% large-cap common stock fund D) a 50% municipal bond fund, 40% government bond fund, 10% money market fund

A

A state-registered investment adviser would be permitted to A) make annual delivery of the brochure within 150 days of the end of the fiscal year B) use Part 2 of the Form ADV to satisfy the brochure requirement C) deliver the brochure to a new client no later than 48 hours after entering into the contract D) use Part 1 of the Form ADV to satisfy the brochure requirement

B

Which of the following is not included in adjusted gross income on an individual's federal income tax return? A) Unemployment compensation B) Municipal bond interest C) Salary and commissions D) Dividends paid on preferred stock

B

Which of the following circumstances would require an investment adviser to notify all clients of the firm? A) The investment adviser acquires the accounts of another firm. B) The investment adviser hires another partner for the firm. C) A partner of the firm was disciplined by the firm. D) The investment adviser opens a branch office in another state.

B - The investment adviser must disclose to the client any change in the members of a partnership.

A grantor retained annuity trust (GRAT)would not be used to reduce estate taxes. gift taxes. income taxes. A) II and III only B) I only C) III only D) I and II only

C - A GRAT is an estate planning tool designed to pass assets to beneficiaries (usually children) in a way to minimize gift and/or estate taxes. Because incidents of ownership remain with the grantor, all income is taxed to the grantor.

The term derivative would apply to which of the following? A) DPPs B) UITs C) Warrants D) REITs

C - A derivative has its value based upon some underlying asset. The value of a warrant is based on the value of the security into which it is exchangeable.

When comparing the pricing of open-end investment companies with that of closed-end investment companies, it is correct to state that A) shares of closed-end funds are generally priced higher than open-end shares. B) both must compute their NAV at least once every day as of the close of trading. C) the closed-end can issue common and preferred shares; the open-end can only issue one class of stock. D) only the open-end bases its price on the next computed net asset value per share.

D

Which of the following is not included in the definition of broker-dealer as found in the Uniform Securities Act? A) Investment advisers B) Credit unions C) Attorneys D) Banks

D

One of your customers has a substantial savings account at the local S&L. The customer has several grandchildren and wants the flexibility of being able to change the beneficiary allocations as their financial conditions change. You should recommend that the customer investigate the use of A) an irrevocable trust. B) a Uniform Transfers to Minors Act (UTMA) account. C) a durable power of attorney (POA). D) a Totten trust.

D - A Totten trust allows for the transfer of ownership of a bank account to a beneficiary or beneficiaries after the owner's death

Under SEC Release 1A-1092, which of the following has (have) met the test of providing advice or analysis concerning securities? A stockbroker calls a client and recommends the purchase of a certain stock. A lawyer recommends against purchasing shares of a mutual fund in favor of another investment. A publisher of an investment newsletter provides general information and recommendations concerning specific securities. A) I and III B) I and II C) I only D) I, II, and III

D - Any person who gives advice (positive or negative, specific or general) or issues reports or analyses concerning specific securities meets the criterion of providing advice. This does not mean that these examples qualify for the definition of investment adviser. They only qualify for the first criterion. For example, a lawyer may be exempt from the definition if she provides advice incidental to the profession and does not receive compensation, but may still meet the first criterion. Likewise, if the stockbroker's only compensation is commissions from securities transactions, the exclusion is in effect.

For which of the following business entities would suitability be based on the objectives of all the owners on a collective basis? A) Sole proprietorship B) Pension plan C) C corporation D) General partnership

D - Because all the partners in a general partnership share collective liability, the investment policy to be followed in the business's account is based on the collective suitability of all partners.

If a businessowner's goal is to establish an entity that features ease in raising capital, which of these entities is the most appropriate? A) An S form of corporation B) A general partnership C) A sole proprietorship D) A limited liability company (LLC)

D - If a businessowner's goal is ease in raising capital, the limited liability company (LLC) is preferable because it has no restrictions on the number or nationality of investors. While the regular or C corporate form is also preferable, the S form of corporation is limited to a maximum of 100 potential shareholders, none of whom may be a nonresident alien.

Several entrepreneurs form an S corporation. Under which of the following circumstances will the entrepreneurs risk losing their tax benefits? 150 new investors buy into the corporation during the year. 1 new member is a nonresident alien. 50% of the corporation's income is derived from passive investments in limited partnerships. The corporation issues several classes of stock. A) I only B) I, II, and III C) I and II D) I, II, III, and IV

D - S corporations must not have more than 100 stockholders, and each stockholder must be a citizen or resident of the United States. The corporation can only have 1 class of stock, and no more than 25% of the corporation's income can come from passive activities. If you were not sure of this last fact, a useful test-taking technique is recognizing that all the other choices are correct and there is no way to select them without this one.

An individual is currently registered as an agent with a broker-dealer. If the agent would like to offer wrap fee programs through the firm, all of the following statements are correct EXCEPT A) the agent would now come under a greater fiduciary responsibility B) the broker-dealer would have to be registered as an investment adviser C) the agent would be defined as an investment adviser representative D) the agent would be defined as an investment adviser

D - The agent would now become an IAR of the firm and, as such, would now carry the additional fiduciary responsibility incurred in the advisory business.

An investor is considering the purchase of some bonds to diversify his portfolio. If he should decide to purchase Treasury STRIPS instead of Treasury Bonds, his major risk would be A) purchasing power risk B) reinvestment risk C) credit risk D) interest rate risk

D - Treasury STRIPS are zero-coupon bonds and, as such, have a longer duration than those paying semiannual interest. The longer the duration, the greater the interest rate risk.

Among the advantages of forming an S corporation rather than a C corporation for a new business enterprise is A) any losses flow through to the investors B) shareholders' losses are limited to the amount of their investment C) the ease in raising substantial amounts of capital. D) unlike the C corporation, which is limited to 100 investors, there is no such limit for an S corporation

A - An S corporation offers the benefit of flow-through of both income and losses (losses being a particular benefit for a start-up because they usually take some time to become profitable). It is the S corporation rather than the C corporation that is limited to 100 investors. Both offer the benefit of limited liability. The C corporation is superior for raising large amounts of capital.

An employer wishing to offer a retirement plan with a goal of retaining key employees would probably start with A) a deferred compensation plan B) a SEP IRA C) a defined benefit plan D) a payroll deduction plan

A - nonqualified plan

If a federal covered investment adviser wishes to sell his business to another advisory firm, which of the following statements is TRUE? A) The sale must be approved by the Administrator. B) No approvals are required. C) The sale must be approved by each customer of the selling adviser. D) The sale must be approved by the SEC.

B - An investment adviser does not need the approval of clients to sell the business. However, technically, the sale means that the advisory contracts will be assigned and that cannot be done without client consent. In an event such as this, the clients would be given the choice of having the new firm manage their assets or taking their accounts elsewhere.

Among investor objectives is preservation of capital. Which of the following would be most appropriate for inclusion in the portfolio of this kind of investor? A) International funds B) A money market fund C) U.S. Treasury bonds D) Blue-chip stocks

B - Preservation of capital means no fluctuations. Money market funds are the only logical choice here. True, the Treasury bonds do not have default risk, but because they can have maturities as long as 30 years, they are subject to interest rate risk.

Under the Regulation D, Rule 506(b) private placement offering exemption, which of the following statements is true? A) The exemption is forfeited if there are any sales to nonaccredited investors. B) The issuer can use an online questionnaire to qualify potential investors C) The rule allows general solicitations but no advertising. D) The issue may be sold to an unlimited number of nonaccredited investors.

B - Rule 506(b) permits a maximum of 35 nonaccredited investors and an unlimited number of accredited investors. The questionnaire is used by the issuer to determine the status of the potential investor. It is Rule 506(c) that permits general solicitation and advertising and requires that all investors be accredited.

Howard is the owner of 4 different insurance policies. Which of the following policies have death benefits proceeds that are NOT subject to income tax upon death of the insured? Policy 1; his wife is the insured. Policy 2; his business partner is the insured. Policy 3; his daughter is the insured. Policy 4; he is the insured. A) II and III B) I, II, III, and IV C) II and IV D) I, II, and III

B - The question is asking for income tax treatment of insurance proceeds, not estate tax treatment. Life insurance proceeds are not income taxable to an original human owner of the policy.

If you were using the discounted cash flow method to determine the appropriate value of a security, you would want to purchase that security when A) the current market price equals the PV B) the rating of the security has just been upgraded C) the current market price is below the PV D) the current market price is above the PV

C

Distributions from which of the following can be rolled over into an IRA? Another IRA Corporate pension plan Corporate profit-sharing plan Keogh plan A) I and IV B) II and III C) I, II, III, and IV D) III and IV

C - Assets from any qualified corporate plan or from another IRA may be rolled over into an IRA.

High-tech Industries (HTI) went public 4 years ago by issuing 100 million shares of common stock at $1 per share. HTI's earnings have soared and the stock is now selling for $13 per share. HTI would be considered A) a mid-cap stock. B) a large-cap stock. C) a micro-cap stock. D) a small-cap stock.

D

Which of the following items are NOT included in the gross estate of a decedent? A) Proceeds from a life insurance policy held in a revocable trust B) Property held in an account registered tenants in common C) The first $250,000 of a primary residence if owned singly, $500,000 if owned jointly with spouse D) Proceeds from a life insurance policy owned by the deceased's spouse

D - One popular estate-planning technique is to have life insurance owned by (and premiums paid by) someone other than the insured. In that case, proceeds are generally excluded from the gross estate of the deceased.

Consent of the client before completion of a trade made between the firm and a client must be made when A) a broker-dealer will be acting in the capacity of an agent B) an investment adviser will be acting in the capacity of a principal C) a broker-dealer will be acting as a contra party to the trade D) a broker-dealer will be acting in the capacity of a principal

B - In those uncommon cases where an investment adviser acts in the capacity of a principal (or agent) with an advisory client, consent of the client before completion of the transaction is required. In the case of broker-dealers, disclosure of capacity on the trade confirmation, but not consent, is needed.

Professor William Sharpe stipulated that certain assumptions must be present for the capital asset pricing model (CAPM) to be useful. Which of the following is not one of these assumptions? A) Investors can always borrow and lend money at the risk-free rate of return. B) All investors have the same expectations for a given investment. C) Investment expenses, such as taxes and transaction costs, are relevant in investment decision making. D) At all times, capital markets are in equilibrium.

C

The USA places a number of recordkeeping requirements on investment advisers. Records required to be kept by all state-registered investment advisers include all of the following EXCEPT A) bank records B) emails C) a record by security showing each client's interest and location thereof D) a list of discretionary accounts

C - The key to this question is the requirement for all advisers. A security record is only required for those advisers who have custody of client assets.

Exceptional Results Advisers (ERA) has $15 billion in AUM and does not accept new clients who are unable to place at least $25 million under ERA's management. From time to time, ERA's clients ask for recommendations for friends or family who don't meet ERA's minimum investment level. In most cases, ERA recommends these prospects to Rational Investment Planning (RIP), a state-registered investment adviser, and receives a referral fee for each person who becomes a client of RIP. The practice A) would only be acceptable if the fee was nominal and not based on the size of the account. B) is prohibited under any circumstance. C) is acceptable because the referral fee is being paid to a registered investment adviser. D) would only be acceptable if the fee was used to reduce the referring client's advisory fees.

C - When a referral fee is paid to another registered firm, there is no problem.

In designing a client's portfolio, a registered investment adviser representative of Greater Wealth Advisory Services recommends the purchase of several stocks from the inventory of Greater Wealth's wholly owned broker-dealer. Under the Investment Advisers Act of 1940, this activity requires written A) consent of and the disclosure to the client prior to execution of the transaction B) disclosure to the client C) consent of the client D) disclosure to the client and consent prior to completion of the transaction

D - Unlike broker-dealers, investment advisers must obtain the consent of and make written disclosure to the client of the intent to act as agent or principal in any transaction with that advisory client. SEC Release IA- 1732 requires that this be accomplished before the completion of the transaction, where completion is defined as settlement date.

Which of the following bonds would appreciate the most if interest rates fell? A) 15-year maturity, selling at a premium B) 15-year maturity, selling at a discount C) 30-year maturity, selling at a premium D) 30-year maturity, selling at a discount

D - discounted bonds, with their lower coupon rates, have a longer duration than a bond selling at a premium and will respond more favorably to falling rates than will those premium bonds.

Which of the following bonds is most affected by interest rate risk? A) 7.8s of '37 yielding 7.3% B) 7s of '32 yielding 7% C) 7.5s of '34 yielding 7.2%. D) 7.6s of '41 yielding 7.2%

D - the bond with the greatest time to maturity (longest duration) will experience the greatest fall in a rising interest rate market.

A broker-dealer with an office in this state would be defined as an investment adviser if it charges: commissions for selling securities commissions for selling securities while offering investment advice incidental to the sale of the securities a fee for selling investment research and additional fees in the form of commissions for the sale of securities fees for investment research sold exclusively to institutions located in this state A) I and II B) III and IV C) I and IV D) II and III

B - A broker-dealer would be considered an investment adviser if it has a place of business in this state and if it charges a fee for selling investment research or any other form of investment advice, even to institutions.

A customer with an aggressive growth investment objective and short-term (6- to 12-month) time horizon wants to invest $50,000 in a mutual fund. He has a substantial net worth, but none of it is invested in mutual funds. You inform him that mutual fund investments are intended to be long-term investments, but he expresses his intention to make the short-term investment anyway. If the XYZ fund family (one you have dealt with in the past) offers an aggressive growth fund that has a respectable track record, your recommendation should be to A) buy the XYZ Aggressive Growth Class B shares with a declining CDSC and 0.75% 12b-1 fee B) decline the transaction because short-term trading of funds is not allowed C) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and 0.75% 12b-1 fee D) buy the XYZ Aggressive Growth Class A shares with a 4% load and 0.25% 12b-1 fee

C

The donor to a 529 plan has decided to move the existing plan to one offered by another state. Which of the following statements is NOT true? A) If there is a distribution of the assets, the rollover must be completed within 60 days. B) Unless a change of beneficiary is involved, only one rollover is permitted in a 12 month period. C) Even though these plans are generally under state control, the rollover rules are federal law. D) This may be done, but only if the entire account is rolled over.

D - partial rollovers are not allowed

A variable annuity annuitant bears all of the following risks EXCEPT A) mortality risk B) interest rate risk C) inflationary risk D) market risk

A - The insurance company issuing the variable annuity bears mortality risk, or the danger that some annuitants will live to surpass their average life expectancy. The investor in a variable annuity bears inflationary risk, market risk, and interest rate risk.

An investor is considering purchasing an equity exchange-traded fund (ETF) to further diversify his portfolio. All of the following are reasons for him to purchase this investment EXCEPT A) shares may be purchased and sold throughout the day. B) lower taxable distributions than most mutual funds. C) ETFs offer tax benefits similar to a limited partnership. D) lower annual expenses than those of mutual funds.

C

Under federal law, an application for becoming an associated person of a broker-dealer would be denied for an individual A) accused of a securities-related felony 110 months ago B) convicted of a felony 122 months ago C) pleading no contest to a misdemeanor involving a financial matter 65 months ago D) who is not a citizen of the United States

C - An individual who is convicted of, or has pleaded guilty or no contest to, any felony or certain misdemeanors in the previous 10 years (120 months) is subject to statutory disqualification. Therefore, the misdemeanor involving a financial matter within the past 10 years is a cause for disqualification. There is no requirement that a registrant be a US Citizen

A portfolio manager who is engaging in rebalancing on a semiannual basis is most likely using which portfolio management style? A) Strategic asset allocation B) Active asset allocation C) Tactical asset allocation D) Buy and hold

A - At least annually, and sometimes more frequently, a portfolio manager who follows strategic asset allocation will examine the relative proportion of the selected asset classes and, based on market performance, rebalance the portfolio to bring it back to its ideal. Active (also called tactical) asset allocation attempts to time the market and doesn't pay the same amount of attention to proportionate holdings as does strategic asset allocation. By its very nature, buy and hold can go years without a portfolio change.

Which of the following would be causes for concern about cybersecurity? A broker-dealer keeps all the firm's financial records in a ledger book A broker-dealer stores some of the firm's financial records electronically A broker-dealer's agents operate as independent contractors and maintain devices that access personally identifiable information about clients A broker-dealer's bookkeeper prefers to do the books from home on a personal computer A) II, III, and IV B) I, II, III, and IV C) I and III D) II and IV

A - Cybersecurity cant happen in a book

An investment advisory contract is considered assigned if an adviser formed as A) a partnership with 2 partners and adds five partners B) a corporation with 2 officers and adds 5 officers C) a partnership with 5 partners and adds 2 partners D) a corporation with 5 officers and adds 2 officers

A - If an advisory firm is formed as a partnership and there is a change in the majority of partners, this is considered to be an involuntary assignment to the new partnership. In this case, client approval is required.

Sharon Smith is an investment adviser representative with Highwater Advisers, a federal covered investment adviser with its principal office in State X. Sharon provides advisory services to a bank located in State X, a state in which she has no place of business. Under current regulations, A) because Sharon has no place of business in State X, she does not have to register as an IAR in State X. B) because Sharon has a client in State X, registration as an IAR would be required in State X. C) because Highwater's principal office is in State X, Sharon would be required to register as an IAR in State X. D) because Sharon's client is a bank, she does not have to register as an IAR in State X.

A - The key is that Sharon is an IAR for a covered IA. When that is the case, the IAR is only required to register in states where she (the IAR) maintains a place of business. Sharon does not have a place of business in State X so no registration is required there.

DEF Investment Advisers, organized as a partnership, is currently registered with State Y. Marjorie is one of the partners and is registered as an IAR. If DEF were to register with State Z, A) Marjorie would automatically be registered as an IAR in State Z. B) Marjorie would be required to complete an application for IAR registration with State Z. C) Marjorie's registration as an IAR in State Z would become effective after passing the Series 65 or Series 66 exam. D) Because DEF is a state-registered investment adviser, Marjorie could only register in State Z if she was a resident of the state.

A - When DEF's registration becomes effective in State Z, those individuals included in the filing are granted automatic registration

You are doing an investment plan for a new client, age 55, who plans to retire at age 70. The client is somewhat risk averse and wants to preserve capital while at the same time not falling prey to possible inflation. Which of the following portfolios would probably be most suitable? A) 40% high-yield bonds; 60% large-cap stocks B) 60% high-quality bonds; 30% large-cap stocks; 10% cash equivalents C) 90% high-quality bonds; 10% large-cap stocks D) 90% large-cap stocks; 10% high-quality bonds

B - Although it is possible to debate this choice (but don't), NASAA would suggest that the bonds and cash offer sufficient capital preservation while this proportion of equities will combat the risk of inflation

Doug runs a sole proprietorship IA and is also a registered agent with Pelf Securities, Inc., a registered broker-dealer. Doug charges his clients an hourly fee for advice, and when they wish to purchase recommended securities, they may do so through Pelf Securities if they have an account there. In those circumstances, Doug earns a commission on the securities transaction in addition to the hourly fee he earned while making that recommendation. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A) the trade could only be placed through Pelf Securities if they were the market maker in the recommended security B) this would be permitted if the compensation were disclosed to the client C) this would constitute a prohibited practice D) this would be acceptable if it were disclosed to the client and the IA fee was based on a percentage of assets under management rather than an hourly bas

B - Investment advisers may charge fees on an hourly basis, as a percentage of assets under management, or even as a flat annual fee. In addition, if licensed as agents of a broker-dealer, they may also earn commissions on transactions routed through that BD. However, disclosure to the client is required, and it must be made clear to the advisory client that transactions may be executed at whatever broker-dealer the client chooses.

An individual is currently registered as an agent with a broker-dealer. If the agent would like to offer wrap fee programs through the firm, all of the following statements are correct EXCEPT A) the agent would now come under a greater fiduciary responsibility B) the agent would be defined as an investment adviser C) the broker-dealer would have to be registered as an investment adviser D) the agent would be defined as an investment adviser representative

B - Once the broker-dealer decides to offer wrap fee programs, it is no longer excluded from the definition of an investment adviser and would become required to register on either the state or federal level.

Your client has $10,000 to invest today and expects to earn an after-tax return of 8% to send his daughter to college in 12 years. Which of the following is needed to determine whether the investment is likely to satisfy the client's goal? A) Consumer Price Index B) Expected cost of college C) Present value D) Client's marginal federal income tax bracket

B - To determine whether the investment will satisfy the goal, the investment adviser representative needs to know the amount needed to pay for college. The information we have here will allow us to compute the future value: $25,181.70. This may not be enough to pay for even 1 year of college 12 years from now.

Under the Uniform Securities Act, all of the following conditions must exist in order for a private placement to be considered an exempt transaction EXCEPT A) commissions may not be paid to sales agents of the broker-dealer offering the securities to noninstitutional clients B) noninstitutional clients must not make payment for their purchases C) broker-dealers and their agents must reasonably believe that noninstitutional clients are buying the securities for investment purposes and not for resale D) the offer must be directed to no more than 10 individuals during any 12-month period

B - just as with any other securities purchase, payment must be made in accordance with industry standards.

Under the Investment Company Act of 1940, which of the following statements is TRUE about an investment company that wishes to contract with an outside investment adviser to manage its portfolio? A) The initial contract must be approved by either the board of directors or a majority vote of the outstanding shares. B) The contract between the investment company and the investment adviser must be in writing. C) The investment adviser must be under common control with the investment company. D) The contract must provide for a minimum notice of at least 2 weeks if the contract is to be terminated.

B -One of the requirements of the Investment Company Act of 1940 is that the contract between a management investment company (open- or closed-end) must be in writing

Long Range Planning (LRP) is a covered investment adviser doing business in all 50 states. Fred Fergus is an IAR with LRP and splits his time between an office in State A and State D. Fred has retail clients as follows: 16 clients in State A 12 clients in State B 6 clients in State C 4 clients in State D Fred would have to register as an IAR in A) States A, B, and C B) States A and C C) States A and D D) States B and C

C